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Health Care Solutions
Sam Gross (11/22/1999)
The
ideal solution would be to match the growth of health care spending to
the growth of GDP: eliminate excess cost growth, while still providing
adequate or even improved levels of heath care for Americans. By
reducing the amount spent on health care, excess cost growth could be
curtailed. This would help significantly lower the federal
deficit because it is one of the fastest growing components of
government spending. These solutions, in one way or another, address
ways in which government health care spending could be reduced:
Solutions:
Reduce the number of people covered by
federal plans.
A
proposed revision is to adjust to age of eligibility to the Medicare
program. As life expectancy increases, it is argued that the age at
which individuals qualify for the program should increase as well. Also, the Social Security eligibility age (the retirement age) is set to
rise to 67, while there are no plans to bring Medicare’s age of
eligibility above 65. Increasing the age of eligibility would reduce
federal spending on the program by decreasing the number of enrollees.
Economic Analysis:
In
comparison to leaving the age of eligibility at 65, the CBO projects
that raising the age of eligibility to 67 would reduce Medicare’s
spending in 2050 by 0.2% of GDP increasing the age of eligibility to 70
would reduce spending by 0.9% of GDP in 2050. While these plans do
reduce projected spending it they remain largely ineffective in fixing
the problem. Furthermore, the decrease in
enrollment in the program would be much greater than the reduction of
costs as the younger beneficiaries in the program are healthier and less
costly than the average beneficiary. Also people may be more inclined
to apply for Social Security disability benefits, if they are on the
borderline of qualification, which would reduce the government’s net
savings.12
Political Analysis:
This
change may simply shift people from Medicare to Medicaid. There are
also chances that it would shift all health care costs to enrollees and
employers. People who retire before becoming eligible might have
difficulty obtaining health insurance on their own. Such a change also
may lead employers to get rid of health benefits to their former
employees due to very high costs.
Back to Solutions
Encourage consumers to be more cost
conscious by raising their contribution to total costs.
A
proposed revision is to increase any one, or combination of: premiums,
co-payments, and deductibles paid by enrollees. One major problem with
health care in America is that it is not consumed efficiently. It is
argued that by raising Medicare/Medicaid enrollees’ contribution they
will be less likely to buy health care services that they don’t need. Increasing premiums etc. would reduce federal spending on the program by
decreasing the share of costs borne by the government.
Economic Analysis:
The
CBO predicts that even substantial increases in premiums, for example
raising Part B (outpatient services and medical supplies) premiums from
25% to 50%, would have mild effects on net federal costs. Medicare’s
costs would still increase from 2.4% or GDP today to 6.7% in 2050, as
many beneficiaries have supplemental coverage that covers this type of
cost sharing. In order to be most effective, the CBO proposes that in
combination with increased cost sharing, rules be made that limit
supplemental coverage.13
Political Analysis:
Any
cost increases to individuals may alienate the poorest among them from
receiving proper medical services. This argument is supported by Marilyn
Moon of the American Institute For Research. By effectively making the
emergency room the only option for these individuals when they have
non-critical problems, efficiency is reduced and costs to the
government are increased. With most normal goods, as prices rise,
consumers will consume less and more actively shop around for
better deals. However, with health care, a case can be made that when
you are sick, you are not going to be in the mood to shop around for a
better deal on a doctor’s visit.14
Back to Solutions
Reduce payments to providers.
A
proposed revision is for
Congress to regulate payments made to health care providers for specific
types of services. In the short run these adjustments may generate
savings, however they do little to get at the root of the problem of
excess cost growth. The problem is not that individual services are
overvalued, it is that unneeded services are consumed and prescribed.
Economic Analysis:
There is a minimum payment at which health care providers will provide
their services.
Political Analysis:
If
Medicare were to limit payments to the point where providers could not
cover their costs, Medicare beneficiaries’ access to care could be
hampered. Instances of this have already been observed indicating that
not much more downward pressure can be exerted on care providers -- at
least in this way.
Back to Solutions
President Bush’s Plan:
Create tax breaks for Americans who
buy their own health insurance.
President Bush proposes to provide bigger tax breaks for Americans who
buy their own health insurance from private companies. The plan aims
to help American recognize the value of the care they
consume. The president believes that if individuals manage their own
health care they will make more efficient choices. President Bush also believes that this will spur
competition between private insurance providers forcing prices lower.
Economic Analysis:
It
is thought that the more involved an individual is in paying for their
health care the more efficient they will be in consuming it. However, a
tax break is still a subsidization of health care which
reduces individuals’ focus on efficiency. Lower prices and greater
efficiency, as a result of competition,
would be very desirable in the current health care system. Competition however, will likely lead to more
cost shifting than cost reduction. As insurance companies become more competitive,
they look for ways to reduce premiums. This is most easily accomplished
by making fewer and smaller payments to care providers. The easiest way
to cut payments is to exclude people that are more costly to insure: the
old and sick.
Political Analysis:
Any
resulting efficiency in the consumption of health care would be
politically benefical. However, if any cost shifting occurred, which is
very likely, many high cost patients’ care would be dumped into the
hands of the government.
Back to Solutions
President Bush’s Plan:
The government should provide
consumers with more information about their healthcare.
The President also advocates helping consumers get more and better
information about their conditions, as well as health care providers’ pricing and
performance. While somewhat vague, this part of the President’s plan
actually gets to the root of the problem that is excess cost growth, and has great potential to solve the problem.
Economic Analysis:
There is a real cost to distributing the information, however only an
abstract/indirect benefit. Some money would likely be diverted from use
in proven medical procedures to an educational campaign.
Political Analysis:
There would likely be some strong opposition to cutting funding from
proven methods to unproven ones. While some studies have been
carried out on the effectiveness of health care education. The results,
however, do not
clearly indicate what amount of education is optimal and how much it
reduces unnecessary consumption.
Back to Solutions
President Bush’s Plan: Create Health Savings Accounts.
These are
tax-preferred accounts
which individuals can use for out of pocket medical expense. The idea
behind these subsidized accounts is to encourage personal saving and
high-deductible insurance plans in order to counter the employer
insurance tax benefits which have encouraged low-deductible plans (which
give no incentive for the consumer to be cost conscious).
Economic Analysis:
Private savings accounts in conjunction with high-deductible insurance
plans would encourage cost-conscious and judicious consumerism,
which have the potential to limit excess cost growth.
Political Analysis:
Shifting the cost of health care more heavily toward the consumer may
encourage cost consciousness and decrease excess cost growth. However,
this may discourage low-income individuals from pursuing preventative
care among low-income individuals. This could have subsequent negative
economic externalities in terms long-run health care costs.
Back
to Solutions
Ration Health Care.
Many
countries outside of the United States already use this system which
seeks to provide guaranteed basic, but limited, health care coverage to
all citizens.
Economic Analysis:
Such
a system would ration the quantity of or spending on health care, and
thus allow for increased control over government spending. All individuals would have access to free
preventative care which could
potentially have positive economic
externalities.
Political Analysis:
This
solution is very socialist in nature and would limit the great choice
that Americans have today in their health care consumption as well as
the ability for private industry to compete in the health care market. For these reasons, it is unlikely that an extreme version of this
solution would be adopted; however, reforms incorporating rationing may
be feasible.
Back to Solutions
Greater Transparency of Information.
A
significant portion of federal health care spending
results in waste due to economic inefficiencies. These inefficiencies
often stem from lack of information when it comes to consumer decision
making in the health care market.
Economic Analysis:
By
making both the quality and cost of various health care services more
transparent, consumers are able
to be more judicious in their spending, creating a more competitive and
efficient market.
Political Analysis:
Lack
of transparency largely comes from the complicated nature of the U.S.
health care system involving health care providers, insurers,
manufacturers, and individuals and their respective interests. Often
times, lack of information yields higher profit for industries and thus
political efforts to increase transparency are difficult but necessary.
Back to Solutions
Encourage preventative procedures,
vaccines, and effectiveness research.
Preventative procedures, including vaccines, are less expensive than
treating the conditions they prevent. Government funding of
preventative medicine and vaccine research should be increased. It would
result in a decrease in frequency of need for the more
expensive remedial procedures. The government
should also support research that compares the effectiveness of
chemically similar medicines.
Economic Analysis:
When it costs an individual the same amount for a preventative procedure
as it does for remedial procedure, they will often forgo preventative
action and take the chance that they will not develop the preventable
condition. However the cost borne by society (the government) is not
equal in these situations: preventative procedures are very inexpensive
where as cures can be extremely costly. There is little incentive for
pharmaceutical companies to test the effectiveness of their drugs
against their competitors, because they risk discovering that their
compound is less effective. However this information is very valuable
to the government in their ability to promote efficiency.
Political Analysis:
This
policy would work well with education campaigns, as people need to be
informed of the value of preventative procedures, and the risk and cost
of forgoing them. This form of massive government funding of medical procedures
may be viewed as quite socialist, and may raise some opposition.
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